Need new well-capitalised asset-reconstruction companies, says RBI study

Notwithstanding the increase in the number of ARCs over time, there has been a concentration in the industry in terms of AUM and the security receipts issued

The asset reconstruction sector, where activity is concentrated among the top five players, needs well-capitalised and well-designed entities to strengthen the asset resolution mechanism further, said a Reserve Bank of India (RBI) study.
 
Notwithstanding the increase in the number of asset reconstruction companies (ARCs) over time, there has been a concentration in the industry in terms of assets under management (AUM) and the security receipts (SRs) issued.
 
Of the total AUM, 76 per cent was held by the top five ARCs in March 2020. Furthermore, in terms of the capital base of the industry, the share of top five was 67 per cent, according a study released as part of RBI’s April 2021 bulletin.

 

Despite the policy push to broaden and enhance the capital base of these companies, they have remained reliant primarily on domestic sources of capital, particularly banks, it said.
 
The cost of acquisition to book value ratio, although posting a slow rise, remains low and is marked by wide variations across ARCs and economic sectors.
 
The ARCs have predominantly resorted to rescheduling of payment obligations as a method of resolution.
 
There is considerable concentration of older SRs in the books of the ARCs, it added.
 
Going forward, a new ARC for addressing the NPAs of public sector banks may also shape the operations of the existing ones.

 
RBI has formed a six-member panel headed by Sudarshan Sen, former executive director, to carry out a comprehensive review of the working of ARCs.
 
The panel will recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector. It will submit its report within three months from the date of its first meeting.